Housing Will Recover. But When?

What passes for optimism on the housing market these days is a pale reflection of the glory days of five years ago. “Housing is dead,” writes MarketWatch’s Rex Nutting. “There is no doubt about that. Housing is as dead as a door nail.” The good news, such as it is, is that “housing is just too small to do any real damage to the economy any more,” he adds. Perhaps, but housing’s not likely to help any time soon either.

Even after five years of a nonstop housing recession, there’s little confidence that the sector is poised for a rebound. And after last week’s dismal news on sales of new single-family homes last month, some analysts wonder if a new round of trouble is coming for residential real estate.

Part of the problem is the glut of homes on the market, a byproduct of the Great Recession. The surfeit of supply is exacerbated by weakness in traditional sources of new demand to soak up the excess. As USA Today reports,

Many first-time home buyers are sitting on the sidelines of the U.S. housing market, hampering its ability to gain traction.

Last month, 34% of existing-home purchases were made by first-time buyers, according to the National Association of Realtors. In January, they were 29% of the market, the lowest since NAR surveys started tracking them monthly in late 2008.

In healthy markets, first-time buyers make up 40% to 45% of all purchasers. They play a critical role in buying starter homes so those owners can buy more expensive homes.

Everyone has to live somewhere, of course. Where are the would-be first-time buyers going? Maybe they’re renting. “Rather than buy homes, growing numbers of Americans are renting apartments and houses,” NPR advises. “The Census Bureau says the national rental vacancy rate for the fourth quarter of 2010 was 9.4 percent, a significant improvement over the 10.7 percent rate in 2009. In fact, landlords haven’t seen rental vacancy rates this low since the winter of 2003.”

If you look hard enough, you can find signs of life in residential real estate. In Las Vegas, for example, one of the hardest-hit regions in the housing crisis, some observers see a recovery approaching… maybe. “The resale home market is up, and the delinquency rate is down,” according to The Las Vegas Sun. But the news is tempered by the accompanying data that shows “sales of new homes are declining, and foreclosures are nudging higher.”

Fortune’s Shawn Tully opines that “the most attractive asset class in America is housing” and so “it’s time to buy again.” According to Mike Castleman, CEO of Metrostudy, a real estate data firm: “The talking heads who are down on real estate will hate to hear this, but America needs to build a lot more houses. And in most markets the price of new homes is fixin’ to rise, not fall.”

If the logic of buying when blood runs in the street has any merit, the housing market surely looks intriguing. By several measures of activity in residential real estate, the sector has suffered a dramatic decline in recent years.

Meanwhile, there have been positive changes on household balance sheets in the wake of the recession. For instance, household debt service payments as a percentage of disposable personal income have dropped substantially since 2007.

At some point, real estate will turn up, offering buyers extraordinary opportunities. It’s unclear if that point is now, next year, or a decade down the line. For all of Castleman’s optimism that the bottom is near, it’s a sign of the depth of the uncertainty that one his colleagues at Metrostudy is unabashedly cautious. The ongoing rise in an already elevated level of residential vacancies is pinching the housing market, warns Brad Hunter, Metrostudy’s chief economist. “More vacant homes equal more downward pressure on home prices,” he tells CNNMoney.